Republican Lawmakers Urge Treasury to Revisit Debt-Equity Regulations

House Ways and Means Committee Chairman Kevin Brady, R-Tex., and Tax Policy Subcommittee Chairman Charles Boustany, R-La., sent Treasury Secretary Jack Lew a letter on June 28 expressing collective GOP concerns over proposed debt-equity regulations under Code Sec. 385. All Republican members of the Ways and Means Committee signed the letter.

Proposed Regulations

The proposed regulations generally would authorize the IRS to treat certain related-party interests in a corporation as indebtedness in part and stock in part for federal tax purposes, as well as establish threshold documentation requirements for certain related-party interests in a corporation to be treated as indebtedness. “We believe any finalization of the proposed regulations in present form will have a profound and detrimental impact on business operations nationwide,” the Republican lawmakers wrote. “If not significantly altered, they will undoubtedly reduce overall investment and economic activity to the detriment of United States and its business community.”

The proposed regulations would implement a “dramatic departure from current policy and practice,” the lawmakers added. Additionally, finalization of the regulations would “turn more than a half century of well-established jurisprudence based upon analysis of an instrument’s actual substance.”

Congress’s Intent

Republican lawmakers also addressed their concern with the Treasury’s stated purpose of proposing the regulations “to further reduce the benefits of and limit the number of corporate tax inversions, including by addressing earnings stripping.” Congress did not intend Code Sec. 385 to police inversion or earnings stripping activities, the lawmakers asserted.

Letter from Democrats

Democratic members of the Ways and Means Committee also wrote to Lew. In a June 22 letter, they expressed concerns over the proposed Code Sec. 385 regulations and requested a meeting with Lew. According to the GOP members of the committee, the letter from their colleagues “”shows that the substantial concerns over these proposed regulations are shared on a bipartisan basis.”

Hearing

The IRS has scheduled a public hearing on the proposed regulations for Thursday, July 14. Republican lawmakers urged the Treasury to extend the public comment period for the proposed regulations until at least October 5, 2016, “to allow businesses an adequate opportunity to evaluate their impact and present solutions to the many problems they create.”

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